India’s Standing Committee Advocates for Fertilizer Tax Reforms

Taj Mahal in sunrise light, Agra, India

India’s Standing Committee on Chemicals and Fertilizers, in a comprehensive report submitted to the Indian Parliament, is pushing for significant revisions to the country’s current fertilizer taxation approach. One of their primary recommendations is for the Union Government to propose to the GST Council a decrease in the existing 5% tax rate on fertilizers. This is especially noteworthy given that fertilizers were originally placed in a 12% tax slab, but subsequent interventions by various states led to its reduction.

A particularly concerning point raised by the Committee pertains to the hefty 18% GST levied on pivotal raw materials, such as sulphuric acid and ammonia, which are crucial for fertilizer production. This stark disparity between the tax rates on finished products and their primary raw materials creates a challenging environment for manufacturers and farmers alike.

According to the report, there are three major discrepancies in fertilizer taxation right now. Firstly, the government’s control of fertilizer prices – ensuring they remain low for food security purposes – effectively results in subsidizing the gap between the production cost and the maximum retail price (MRP). Notably, for products like urea, the MRP is approximately one-tenth of the actual cost. With the government covering such a significant portion of costs, imposing a tax seems counterproductive.

Secondly, a disjointed tax approach exists, with some fertilizer components falling under the GST and others under the pre-GST regime. Key raw materials, such as urea and dia-ammonium phosphate (DAP), currently incur a 5% GST. In contrast, natural gas (NG) – used predominantly in domestic urea production – remains outside the GST framework, leading to cascading tax implications and higher costs.

Thirdly, the difference in tax rates between inputs and outputs in fertilizer production results in unabsorbed input tax credit (ITC). Due to the artificially reduced MRP of products like urea, the output tax is considerably less than the input tax. This imbalance means the government must compensate manufacturers for unabsorbed ITC from its fertilizer subsidy budget.

Currently the actual cost of producing fertilizers is significantly higher than the price the Union Government expects farmers to pay. The most pragmatic solution to this situation would be to eliminate these taxes. However, if taxation is deemed necessary, it would be beneficial for all components in the supply chain to be taxed under the GST at the lowest slab of 5%.

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